Will a Member Death mean Large Taxes in an SMSF?

Recent news about a new draft tax ruling that self managed super funds (SMSFs) could face retrospective tax bills on the death of a member are throwing estate planning arrangements into array, reporting that the extra taxes must be paid on top of the 16.5% death benefits tax in cases where the beneficiary is an adult child.

The Australian Financial Review press coverage had a front page article on July 22, writing “The Australian Taxation Office has issued a new draft tax ruling that means spouses and children could face six-figure tax bills on the death of a parent or partner, while throwing estate planning arrangements into chaos.”

Our own Professional association, Self Managed Super Fund Professionals’ Association (SPAA) stated in a press release that the ruling would apply respectively from July 2007. http://spaa.asn.au/portal/index.php

However Michael Laurence at Smart Company reportsthat the draft tax ruling doesn’t make changes. It simply confirms the Tax Office’s long-held view on existing law. And the ATO’s interpretation, love it or hate, has also long been widely understood. He also reports –

Meg Heffron, co-principal of SMSF administrator Heffron, succinctly explains the consequences of the draft is confirmation of the ATO’s legal interpretation that “when a [superannuation] pensioner dies, capital gains tax will be payable on the sale of the assets to pay the lump sum benefit”. It’s as straightforward as that.

“… the gain will be worked out based on the original purchase price of the asset rather than its value at the time of death,” she adds. “There is no mechanism for stripping out the gains which built up while the fund was in the [tax-free] pension phase.”

The draft ruling applies mainly to SMSFs. This is because large funds with their continual stream of new members and contributions may not have to sell assets to pay super death benefits.

An interesting response from Bartier Perry re-affirms this – The Draft Ruling clarifies the ATO’s position on the law relating to the tax treatment of superannuation income streams (issued as a draft and open for public comment until 26 August 2011) and does not introduce new rules. Specifically, the Draft Ruling considers that an income stream ceases as soon as the member receiving the income stream dies.

Once again some conflicting views on interpretation of legislation.

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Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
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